Demand for oil in the United States is rising and outpacing production despite talk of the shale oil revolutions argues Angelos Damaskos, CEO of Sector Investment Managers and fund adviser to the Junior Oils Trust.

Damaskos notes that Exxon-Mobil and BP have reported a drop in reserves and production and says this suggests giant mature oil fields are in decline.

In a note issued today, he says: “It has become apparent that demand in the United States is rising, outpacing growth in production. The price of West Texas Intermediate now trades some $5/barrel less than Brent after two years of discount as large as $25/barrel.”

However he says he does not favour the oil majors which are facing increasing expense.

“Integrated majors like Exxon-Mobil and BP have reported a drop in reserves and production while their cost base is rising. These reports confirm the view that the giant, mature oil fields of the world are in decline and the push into frontier areas, both technological, such as shale-fracking, as well as geological, such as the pre-salt basins offshore Brazil, come at a much higher cost.”

He says there is a potential for increased production from some politically unstable regions such as Iran and Iraq but adds that “the timing and probability of this happening is questionable”.

“Outages of production from countries such as Nigeria place further constrain on supply. Saudi Arabia now reportedly produces more than 10 million barrels a day, more that it has ever produced, highlighting OPEC’s confidence that the supply-demand outlook is likely to sustain prices well above their “target” floor of $100/barrel”.

Damaskos has also set his his fund’s top picks with explanations below.

Fund top picks

Core holding: Caza Oil & Gas
Caza announced a financing plan to help accelerate its drilling programme in its New Mexico acreage. The company’s recent drilling results confirmed the production potential from its portfolio of properties and its shares re-rated by more than 20%.

FAR Ltd
FAR, together with its farm-in partner Cairn Energy managed to entice super-major Conoco Philips into an acquisition of a 35% carried interest in acreage offshore Senegal. FAR will be carried through two wells up to a cost of $190m and will receive $9.8m for past costs. These wells target prospective resources estimated at between 1-3.5 billion barrels. As the company retains a 15% carried interest, exploration success of that measure would be transformational. FAR shares rose by more that 40% subsequent to the announcement.

These results highlight the fundamental value in the fund’s portfolio and the potential for re-rating as investors’ interest in small-cap oil companies returns. As the large-cap, dividend paying shares become overvalued, the possibility of a rotation into higher beta plays increases. Those smaller, oversold companies that have been able to survive the last two years of bear market and secure the backing of larger peers are likely to outperform the sector and the market.